Measuring Event Risk

Research output: Contribution to journalArticle

Abstract

This paper decomposes the popular risk measure Value-at-Risk (VaR) into
one jump- and one continuous component. The continuous component corresponds
to general market risk and the jump component is proportional to the event risk as defined in the Basel II accord. We find that event risk, which
is currently not incorporated into most banks’ VaR models, comprises a substantial part of total VaR. It constitutes 30% of the risk for a portfolio of small cap stocks but less than 1% for a portfolio of large cap stocks. The national supervising agency in each membership country is advised by the Basel rules to add an additional capital charge to a bank whose models do not capture event risk. The large variation in event risk, also found across 10 individual stocks, suggests that an approach that varies the capital surcharge, based on the type of asset, should be used by the supervisors.

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Authors
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Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • Value-at-Risk, Jumps
Original languageEnglish
Pages (from-to)265-287
JournalJournal of Financial Econometrics
Volume7
Issue number3
Publication statusPublished - 2009
Publication categoryResearch
Peer-reviewedYes